And so, I think that where we are today, we’re not going to go out and, and do, a ton of new loans, obviously, we’re going to be monitoring repayments, we’re going to be monitoring liquidity, monitoring, managing our overall portfolio. But I think that, putting a couple of chips on the table right now in this, in this environment as a lender is the right thing in terms of, setting up our portfolio on the go forward to access interesting opportunities.
Operator: We’ll go next to Jade Rahmani with KBW.
Jason Sabshon: This is Jason Sapshon on for Jade. So, I’m curious what you’re hearing from your multifamily and life science borrowers. If properties were underwritten to much lower cap rates and lease up is slower, and NOI is taking longer to stabilize, how do they typically manage through the next 18 months?
Katie Keenan: Sure. So I think that’s a, that’s a great question. And, as we mentioned in the remarks, our multifamily portfolio today is 99.4% performing and post quarter end selling the asset that we sold, it’s now 100% performing. We’ve seen NOI growth of 35% since we originated these loans, and we started at 67% LTV. So, while we do see some pressure, especially obviously, it’s been broadly discussed in the Sunbelt from new supply, that’s really resulting in rents kind of flattening out, there’s been a lot of growth in these markets, a lot of NOI growth in our assets, and then obviously business plans, these are all value add assets to start. So they had incremental business plans to renovate increased rents as, in addition to the growth in the market generally.
So in terms of, how the borrowers are addressing, I mean, I think you can see it in the rate cap rolls, we had, a couple billion dollars of multi rate cap rolls have already happened in ’23. You can see it in the performance of the portfolio. And I think that really a lot of it comes down to the leverage point and the types of borrowers that we’re lending to. These are well capitalized borrowers, they see the supply demand fundamentals easing up in ’25, new starts or, construction deliveries in ’25 are much lower than ’24. And this is really sort of a temporary moment in time, in a very liquid asset class where there continues to be a lot of capital, a lot of debt availability from agencies, insurance companies and others. And it’s really going through a temporary pocket that, I think by and large are sort of long, patient, well capitalized borrowers are going to be able to see their way through and we haven’t seen any indication otherwise in the performance of the portfolio.
Jason Sabshon: Great, thank you. And then with respect to life science borrowers, as have you seen lease uptaking slower than expected or have the business plans generally been following expectations?
Katie Keenan: Yes, so we have very little life science in the portfolio. the largest asset is a brand new build asset, in Berkeley in California, right on the water. It’s a super high quality trophy asset at a low leverage point. That’s in the process under construction. So it’s really a little too early to tell. I would say by and large, we really only have a couple of assets and they’re all low leverage new construction.
Operator: We’ll go next to Rick Shane with JPMorgan.
Richard Shane: Thanks, everybody for taking my question. Katie, I’d love to talk a little bit about the interplay between gap earnings, distributable earnings and dividend policy. You’ve spoken clearly about over-earning the dividend this year on a distributable earnings basis. If we take, for example, and I’m going to make a couple assumptions here, we look at your reserve, we say that you are 25% over-reserved versus what you’re going to realize for losses. Seems like a three years for the reserves that you’re going to use to run through the distributable earnings. That represents about $150 million a year drag to distributable earnings. It’s probably $0.85, $0.90. How will you think about the dividend if it materializes along that path, which seems reasonable in terms of continuing the dividend at the current level, if you’re not likely to earn it on a distributable basis?
Anthony Marone: Great question. So I’d say the jump to the dividend policy question, which we spoke about a little bit in the prepared remarks, what we focus on when we’re setting our dividend, which is what we focused on for several years now, is what do we think is the right dividend level relative to the long-term run rate earnings power of BXMT? You’ve seen many quarters where we well out-earned the dividend, for example, and we didn’t increase our dividend because we felt like that was a peak that might come down. We had some quarters, although not many, going back to 2015, where we under-earned the dividend, but we again felt like that was temporal and so didn’t cut the dividend. So what we really focused on is what do we think is the earnings power of our dividend?
And so we would anchor to our earnings for this quarter, which were not impacted by losses, and the things that we’ll move at over time, which we’ve highlighted on the call. So you would have impact from rates, you’d have impact from other loans going non-accrual, you’d have the benefit of previous non-accrual loans coming back online, new originations when they happen, et cetera. So we look out over time at how do we think those factors will come together to impact the earnings power of the company. And if that aligns with the $0.62 dividend, then we feel good about our dividend. When that doesn’t align with the $0.62 dividend, then of course we’re going to reconsider our dividend level. But that’s more where we’re focused and less trying to make a judgment and the numbers you drew out are a fine estimate if one wanted to make one, but we’re less focused on where do we think the episodic losses are going to head over a period of time and more where do we think the overall earnings power of the company is.
Richard Shane: Got it. And that’s helpful. And look, there’s this inherent disconnect here. Gap makes you assume losses, distributable makes you realize losses, and it is imperfect in the context of that dividend policy. Ultimately, you can’t be a lender and not consider the costs of credit. When we look at distributable income for this year, it was about $3, just over $3, and the dividend was $2.48. Is a reasonable way to look at this that you see the long-term credit costs and the dividend policy that you just described is about $0.50 per year? And that, because again, we can’t ignore credit, but we also can’t, we realize that there’s a tax implication in terms of distributable as well?
Anthony Marone: So I think when you’re saying credit costs, just to make sure, you’re not talking about the cost of our debt. You’re talking about credit losses when you say credit costs?
Richard Shane: Yes, exactly.
Anthony Marone: Yes. So I think, so firstly, as a REIT, maybe this is where you’re going. As a REIT, we have to anchor to the taxable income impact, which says that we have to distribute our taxable income, 90% of it, and you can pay some tax. So we satisfy that. So we don’t have any issues as far as satisfying the tax requirements. As we’re realizing losses, to your point, that does impact your tax accounting. So if you do realize a loss on a loan because you get a DPO or you foreclose and sell for less than your basis, that is a tax deduction. So all of those flow through. The timing may not be the exact same, but all of those realized losses will flow through overtime, GAAP, and DE, and tax. Again, timing may be different.
So I wouldn’t interpolate that we think that there’s some sort of an imputed $0.50 credit loss based on how we out-earned our dividend this year. What impacted our ability to out-earn our dividend this year isn’t because there’s some tax losses existing below the surface that we think would perpetuate on a year-by-year basis. It’s because in some prior periods, we had other tax attributes, for example, NOLs from our legacy capital trust business, or some periods where we had over distributions on a tax basis, again, going back many years. Those carried forward to this year and allowed us to earn a level well above our dividend while satisfying the tax rules because we had this cushion coming in. It’s not that there’s some sort of imputed $0.50 tax loss that was allowing us meet our dividend requirement that you should think of as a go-forward $0.50 loss rate that I would predict.
Katie Keenan: I think, Rick, big picture, what matters in terms of how we look at the dividend is what our earnings power is after we get through the impairments and the losses. So we’re going to have some quarters where we have gap earnings impacted by reserves, as we did this quarter. We’re going to have some quarters where we’re going to have DE impacted by realized losses. But what really matters is, on the other hand, on the other side of that, our investable equity, the earnings power of that relative to our overall business, and that’s how we think about the dividend.
Operator: We’ll take our final question from Arren Cyganovich with Citi.
Timothy Hayes: Arren, are you there?
Operator: Please check your mute function. Your line is open.
Arren Cyganovich: Sorry. Can you hear me now?
Operator: Please go ahead. Yep.
Arren Cyganovich: Sorry about that. The Los Angeles office that was downgraded to four from five, there’s a much smaller, I guess, net book value on that versus the principal. Is that something that where you sold a piece of that? Or maybe you could just talk a little bit about that loan?
Katie Keenan: Sure. So that’s a really high quality asset in West LA. It signed a couple of big high rent leases well above our underwriting, but taking longer to lease, I think in part because of the strikes and what happened over the last year in the content industry. We have a loan there that we originated as a whole loan and then sold the senior loan. So that’s the difference in terms of book value that you’re seeing. And we’re in a very constructive conversation on that deal in terms of the modification, but we downgraded it because we’re in that conversation.
